Chapter 1

Globalization

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
 What Is Globalization? 1 of 3

The Globalization of Markets

• Falling barriers to cross-border trade and
investment (uncertainty??)
• Global tastes (Starbucks / Heytea?)
• Benefits small and large companies (really?)
• Significant differences between national markets
• Products that serve universal needs are global
• Competitors may not change among nations

©McGraw-Hill Education.
 What Is Globalization? 2 of 3
The Globalization of Production
• Sourcing goods to take advantage of differences in
cost and quality of factors of production (Foxconn)
• Early outsourcing was confined to manufacturing
• Technology now used for outsourcing (e.g. MRI reports or
software debugging in India)

©McGraw-Hill Education.
 What Is Globalization? 3 of 3
The Globalization of Production continued
• Robert Reich and “global products” (Inequality: how
globalization, technology and natural resources are reshaping
global economy. 400 richest have more wealth than bottom 150
million Americans)

• Impediments / Obstructions
• Formal and informal barriers to trade (e.g. custom clearance)
• Transportation costs (e.g. uncertainty with oil price)
• Political and economic risk (e.g. government regulations)
• Coordination (e.g. managerial challenge in supply chain)

©McGraw-Hill Education.
 The Emergence of Global Institutions 1 of 6
General Agreement on Tariffs and Trade (GATT)
World Trade Organization
International Monetary Fund
The World Bank
The United Nations

©McGraw-Hill Education.
 The Emergence of Global Institutions 2 of 6
The World Trade Organization
• Polices the world trading system
• Ensures nation-states adhere to the rules
• Facilitates multinational agreements among members
• 164 nations account for 98 percent of world trade

©McGraw-Hill Education.
 The Emergence of Global Institutions 3 of 6
The International Monetary Fund
• Established to maintain order in the international
monetary system
• Lender of last resort
• Requires nation-states to adopt specific economic
policies aimed at returning their economies to stability
and growth

©McGraw-Hill Education.
 The Emergence of Global Institutions 4 of 6
The World Bank
• Promotes economic development
• Focused on making low-interest loans to cash-
strapped governments in poor nations that wish to
undertake significant infrastructure investments

©McGraw-Hill Education.
 The Emergence of Global Institutions 5 of 6
The United Nations
• Peace through international cooperation and
collective security
• 193 countries
• UN Charter – four basic purposes
• Maintain international peace and security
• Develop friendly relations among nations
• Cooperate in solving international problems and in promoting
respect for human rights
• Be a center for harmonizing the actions of nations

©McGraw-Hill Education.
©McGraw-Hill Education.
 The Emergence of Global Institutions 6 of 6
Group of Twenty (G20)
• Finance ministers and central bank governors of the
19 largest economies in the world, plus
representatives from the European Union and the
European Central Bank
• Represents 90 percent of global GDP and 80 percent
of international global trade

©McGraw-Hill Education.
©McGraw-Hill Education.
 Drivers of Globalization 1 of 4

Declining Trade and Investment Barriers

• 1920s-30s: Barriers to international trade and
foreign direct investment
• High tariffs resulted in retaliatory trade policies

• GATT lowered barriers

• Uruguay Round
• Established World Trade Organization (WTO)

©McGraw-Hill Education.
 Drivers of Globalization 2 of 4
Knowledge Society and Trade Agreements
• The value of world trade in merchandised goods has
grown consistently faster than the growth rate in the
world economy since 1950.
• Trade across country borders is 2.6 times higher than world
production.
• Knowledge society has produced more informed consumers,
driving demand.
• Removal of restrictions to FDI (Foreign Direct Investment)
• More trade agreements

©McGraw-Hill Education.
 Figure 1.1 Value of world trade, world production, number of regional
trade agreements in force, and world population from 1960 to 2020 (index
1960 = 100).

Jump to long description in

appendix

©McGraw-Hill Education. Sources: World Bank, 2017; World Trade Organization, 2017; United Nations, 2017.
 Figure 1.2 Comparisons of world trade and world population; world
trade and number of regional trade agreements; world population and
world production; and world population and world trade (index 1960 =
100).

Jump to long description in

appendix
©McGraw-Hill Education. Sources: World Bank, 2017; World Trade Organization, 2017; United Nations, 2017.
 Drivers of Globalization 3 of 4
Role of Technological Change
• Communications
• Development of the microprocessor
• Moore’s Law
• Internet of things
• Half the world’s population uses the Internet
• Global e-commerce sales over $2 trillion
• The Internet is an equalizer (information equilibrium)

©McGraw-Hill Education.
 Drivers of Globalization 4 of 4
Role of Technological Change continued

• Transportation technology
• Commercial jet travel, superfreighters, and
containerization
• Implications for the globalization of production
• Has become more economical
• Worldwide communications network
• Implications for the globalization of markets
• Convergence of consumer tastes and preferences

©McGraw-Hill Education.
 The Changing Demographics of the
Global Economy 1 of 6

The Changing World Output and World Trade

Picture
• U.S. has experienced a relative decline reflecting the
faster economic growth of several other economies
• China and BRIC countries growing more rapidly
• Developing nations may account for more than 60 percent
of world economic activity by 2025

©McGraw-Hill Education.
 The Changing Demographics of the
Global Economy 2 of 6
The Changing Foreign Direct Investment Picture
• Non-U.S. firms are increasingly investing across
national borders
• Desire to disperse production activities to optimal locations
and to build a direct presence in major foreign markets

©McGraw-Hill Education.
 Figure 1.3 Share of FDI stock outward as a
percentage of GDP.

©McGraw-Hill Education. Sources: OECD data 2017, FDI stocks.

 Figure 1.4 FDI inflows (in millions of dollars)

Jump to long description in

appendix
©McGraw-Hill Education. Source: United Nations Conference on Trade and Development, World Investment Report 2017. (Data for 2018–2020 are forecast.)
 The Changing Demographics of the
Global Economy 3 of 6
The Changing Nature of the Multinational
Enterprise
• Non-U.S. multinationals
• In 2003, 38.8 percent of the world’s 2000 largest
multinationals were U.S. firms
• By 2017, 27 percent of the top 2000 global firms are now
U.S. multinationals, a drop of 236 firms

©McGraw-Hill Education.
 The Changing Demographics of the
Global Economy 4 of 6
The Changing Nature of the Multinational
Enterprise (continued)
• The rise of mini-multinationals
• Medium- and small-sized businesses
• Internet is lowering barriers

©McGraw-Hill Education.
 The Changing Demographics of the
Global Economy 5 of 6
The Changing World Order
• Former communist countries present export and
investment opportunities
• Signs of growing unrest and totalitarianism
• China moving to industrial superpower
• Latin America debt and inflation are down, more
private investors, expanding economies

©McGraw-Hill Education.
 The Changing Demographics of the
Global Economy 6 of 6
Global Economy of the Twenty-First Century
• Barriers to the free flow of goods, services, and
capital have been coming down (really?)
• Strengthened by the widespread adoption of liberal
economic policies by countries that had firmly
opposed them
• Globalization is not inevitable
• Countries may pull back
• Risks are high

©McGraw-Hill Education.
 The Globalization Debate 1 of 7

Antiglobalization Protests
• 1999 protests at WTO meeting
• Detrimental /Harmful effects on living standards,
wage rates, and the environment.

©McGraw-Hill Education.
 The Globalization Debate 2 of 7
Globalization, Jobs, and Income
• Critics of globalization argue:
• Falling trade barriers allow firms to move manufacturing
activities to countries where wage rates are much lower
• Destroy manufacturing jobs in wealthy advanced economies

• Services also being outsourced

• Contributing to higher unemployment and lower living
standards in their home nations

©McGraw-Hill Education.
 The Globalization Debate 3 of 7
Globalization, Jobs, and Income continued

• Supporters argue:
• Benefits outweigh the costs
• Free trade will result in countries specializing in the
production of goods and services that they can
produce most efficiently, while importing goods and
services that they cannot produce as efficiently
• As a result, the whole economy is better off
(Inequality?)
• Companies can reduce their cost structure, and
consumers benefit (will that happen?)

©McGraw-Hill Education.
 The Globalization Debate 4 of 7
Globalization, Jobs, and Income continued

• Data suggests the share of labor in national

income has declined
• Share of national income by skilled labor has increased
• Unskilled labor experienced a fall in income, but not
necessarily standard of living due to economic growth

• The weak growth rate in real wage rates for

unskilled workers is likely due to a technology-
induced shift within advanced economies
• Technological change has a bigger impact than
globalization on declining share of national income
enjoyed by labor

©McGraw-Hill Education.
 The Globalization Debate 5 of 7
Globalization, Labor Policies, and the Environment
• Critics argue:
• Labor and environmental regulations (increase costs)
• Lack of regulation can lead to abuse
• Adhering to regulations increases costs
• As countries get richer, they enact tougher
environmental and labor regulations (China’s road)
• Supporters argue:
• Tougher environmental regulations and stricter labor
standards go hand in hand with economic progress (will
lead to technology innovation and job loss?)

©McGraw-Hill Education.
 Figure 1.6 Income levels and environmental
pollution

©McGraw-Hill Education. Source: C. W. L. Hill and G. T. M. Hult, Global Business Today (New York: McGraw-Hill Education, 2018).
 The Globalization Debate 6 of 7
Globalization and National Sovereignty
• Critics argue:
• Shift of power from national governments toward
supranational organizations
• WTO, EU, United Nations

• Supporters argue:
• The power of supranational organizations is limited
to what nation-states collectively agree to grant
• These organizations exist to serve the collective
interests of member states

©McGraw-Hill Education.
 The Globalization Debate 7 of 7
Globalization and the World’s Poor
• Critics argue:
• Gap between the rich and poor nations has
gotten wider
• Totalitarian governments
• Poor economic policies
• Corruption and lack of property rights
• Expanding populations in developing countries
• Debt burdens
• Supporters argue:
• The best way to change the situation is to lower
barriers to trade and investment and promote
free market policies

©McGraw-Hill Education.
 Managing in the Global Marketplace

Managers
• Managing an international business differs from
managing a purely domestic business
• Need to vary practices from country to country
• More complex decisions required
• Need to understand the international trading and
investment system, currency exchange

©McGraw-Hill Education.